A mantra that precedes every investment plan – start early. Most investors start the hunt for tax saving instruments during the end of the financial year, when the fear of tax hits them. Investments in tax saving instruments demand attention and research. Starting early can help you make better choices, save tax more efficiently and capitalize on the investment returns. Tax planning is no child’s play. For the same reason, you could consider engaging a financial adviser who would guide you through the entire process, choosing the tax saving instrument, investing, and then monitoring the performance to make sure you do not go astray.
By composing the right mix of investments for your portfolio, you can exempt more of your income from tax and ensure that you are receiving optimal returns. Section 80C of the Income Tax Act offers a broad range of options, each suited to a different need. However, an Equity Linked Savings Scheme (ELSS) provides investors tax benefits combined with long-term wealth creation through equity exposure and comes with the shortest lock-in among all tax-saving instruments.
Investing in an ELSS through a Systematic investment plan (SIP) will not only be easier on the pocket, but will also, provide the benefit of rupee cost averaging and help take advantage of the power of compounding. This strategy is prudent as it decreases the risk of abrupt market declines which deplete your portfolio. SIPs lead to continuous investing regardless of fluctuating price levels in the market.
Let's assume that of the Rs. 1,50,000 amount available under Section 80C your Provident Fund (PF) contribution (in case you are a salaried employee) in the year amounts to Rs. 1,00,000 leaving you with Rs. 50,000 to invest in other tax saving instruments. By starting a monthly SIP of Rs. 3,000 in an ELSS fund you could cover the entire amount in a span of 12 months. This would not only reduce your load to save for tax investment at the end of the year but will also help benefit from the power of compounding right away!
Next step Start a monthly SIP in an ELSS fund to get triple benefits - tax savings, systematic investing and an opportunity to harness the potential upside of investing in the equity market.
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